Why am I losing inflation benefits of my Guaranteed Minimum Pension? Steve Webb explains knotty rules and how they changed in state pension overhaul of 2016

Former Pensions Minister Steve Webb is This Is Money's Agony Uncle. This week, he answers a reader who had Guaranteed Minimum Pension rights under an old employer's final salary scheme.

She says she will lose out on GMP inflation-linked increases to her income in old age, because her state pension age has been delayed until 2019.

That postponement means she will now retire under the new flat-rate system introduced in April 2016, which abolished many old, complicated rules, such as those involving the GMP - itself discontinued back in 1997.

Steve explains how the GMP used to work, how the rules have changed for people retiring from last Spring onwards, and how this reader might still end up benefiting under the new state pension system.

If you had GMP rights under an old pension scheme, but have reached or are due to hit state pension age after April 2016, this will tell you where you stand.

Old pension rights: How did the Guaranteed Minimum Pension work, and how have the rules changed? (Stock image)

Could you please advise me on how I can obtain the annual increases due on the Guaranteed Minimum Pension part of my deferred pension which I now receive from my old employer.

I reached 60 in March 2014 and my deferred pension became payable at that time. I have since then received £4,432 per annum.

Apparently my pension is made up entirely from 'Pre 88 GMP' so annual increases should be provided by the 'State', presumably via my state pension.

My state pension age has been increased twice, to March 2018 in my pension forecast in 2010, and now to September 2019 in my latest forecast.

Does this mean that I will lose five years' worth of increases or will these increases be added to my state pension when I finally get it (a remote hope I realise!!)?

As regular readers will know by now, many people 'contracted out' of SERPS, either voluntarily or because their pension scheme did so on their behalf (see the box on the right).

Employers operating final salary pensions - also known as 'defined benefit' schemes - were allowed to contract out their staff and pay a reduced rate of National Insurance Contributions.

In return, they had to promise that the company pension would at least match the SERPS pension that the worker would have got under normal circumstances. The pension which the scheme had to provide was called a ‘Guaranteed Minimum Pension’ (GMP).

There were no such guarantees for workers whose employers operated 'defined contribution' pensions, or for individuals who chose to put the National Insurance rebates they received as a result of contracting out into personal pension schemes.

How did the GMP work?

The Guaranteed Minimum Pension system ran between 1978 and 1997, after which it was discontinued by the Government.

Different rules applied to GMP annual inflation-linked increases in two distinct periods - 1978-1988, and 1988-1997. This means the GMP can rise at different rates depending on when you built up your pension.

The rules on GMP upratings are described in some detail in a helpful briefing prepared by the House of Commons library which you can find here, but I will summarise the key points.

For service before 1988 there is no duty on your scheme to provide inflation-linked increases, whilst for service between 1988 and 1997 they have to provide inflation-linked increases up to a cap of 3 per cent.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

You say your pension is made up entirely from 'Pre 88 GMP', so it falls into the former camp.

If we suppose that you had been able to draw a state pension on your 60th birthday, what would have happened is that the Government would have paid you a basic pension, worked out what SERPS pension you would have got if you had not contracted out and then deducted your GMP.

In theory, the ‘gross’ SERPS figure and the GMP should be the same and the difference is zero - though often GMP ends up being higher for a variety of complex reasons, but basically the way many employers calculated annual increases to GMP during this period worked in favour of their staff.

In the year after your 60th birthday your GMP would be unchanged - because all your service was pre 1988, as explained above - whilst your gross SERPS would have increased in line with inflation.

Your total pension income (state pension plus occupational pension) would therefore increase, even though the scheme has no legal duty to pay inflation-linked increases for service before 1988.

However, you are now due to retire under the new state pension system launched last Spring instead.

What happens to people with GMP who retire after April 2016?

In April 2016, the Government made big changes to the state pension. No-one any longer builds up rights under SERPS and there is no longer any contracting out.

So what happens to people retiring from April 2016 onwards is that a one-off calculation is done to see how much pension you have built up at that point.

Someone who has been extensively contracted out will just get the basic state pension figure.

And after that, the rather strange business of the state pension making up for some of the indexation - inflation-linked increases - that the occupational scheme never had to promise disappears.

There are two ways of looking at this.

One way would be to say that, taken in isolation, people in your situation have lost out on inflation-linked increases you would otherwise have had under the old rules.

The other way would be to focus on the opportunity for post 2016 service which will enable you to build your state pension beyond the £119 per week which is all someone who was fully contracted out could ever have got under the old rules.

One extra year of work (or voluntary contributions) post April 2016 will give you a bigger state pension than you could have got as a contracted out worker under the old rules.

Also, that flat-rate state pension now has to be uprated every year, at least in line with average earnings under the law, but in practice under the Triple Lock - the Government's present policy of setting increases by whatever is the highest of price inflation, average earnings growth or 2.5 per cent.

In summary, the old rules were very complex and varied from scheme to scheme and had all sorts of arbitrary features like the different rules for service before and after 1988.

The new system is far simpler, with no contracting out, no new GMPs and across-the-board earnings-related increases to state pensions up to the full flat rate, which is currently £155.65 a week but will rise to £159.55 this April.

You won’t get inflation-linked increases through the state scheme for your pre-1988 service in the way that you would have done, but you will be under a new state pension system that is simpler and pays higher average amounts to women than the old system.

ASK STEVE WEBB A PENSION QUESTION

Former Pensions Minister Steve Webb is This Is Money's Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.

Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes.

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